Article / 26 February 2013 at 8:38 GMT

Italy’s political earthquake – and now Bernanke's testimony

Head of FX Strategy / Saxo Bank

This Italian election results have obviously generated extreme uncertainty – and for good reason. And now we have the Fed Chairman Bernanke’s semi-annual testimony before Congress. Volatility to stay high.

Concern over Italian election results
The express intent of Beppe Grillo’s Five Star Movement was always to disrupt the new government to make a point. With the result of a hung parliament, we now transition to an uncertain in which it is likely that no new government will be able to form and then we’re off to new elections. At that point, Italian voters will have to decide which of the parties has sharpened its message enough to harvest a possible majority. Either way – the systemic risk trade is clearly back on with this result, as we likely eventually face a new election with an unknown time frame and the antagonism that this interim period could generate with the EU leadership is unknown.

The EURUSD chart had already suffered a tremendous blow recently with the move back through the 1.3300 area support, but there is a bit of finality now that we have traversed most of the zone back toward 1.3000. Now it is a question of figuring out the magnitude of any throwback rallies. 1.3100-1.3149 is perhaps the first zone of resistance now, with 1.3250-1.3300 the bigger structural key resistance. To the downside, 1.3000 looms as a psychological support. Let’s remember that we have the general risk of headlines and nervous money everywhere at all times.



Odds and ends
The RBA’s Debelle was out overnight boasting that the RBA still has room to tinker with rates if the AUD currency proves too strong – rhetoric that got little response from the market, but should be noted.

Carney was out downshifting BoC rhetoric on the economy, helping to keep the CAD weak (though the AUDCAD move to me looks extremely exaggerated – particularly given what the RBA said overnight – big moves like we are seeing recently create odd moves in some crosses due to positioning extremes and nervous trading. I’ll never forget the incredible AUDNZD sell-off in October ’08 that had no fundamental driver – it was merely about AUD seeing the most panic deleveraging of positions. By the end of Jan ’09, AUDNZD had rallied back some 2000 pips to where it had come from.

Japan’s Finance Minister Aso made boilerplate comments about excessive JPY moves not being desirable, etc…

Looking ahead
We have Bernanke testimony up today – there are no expectations that I can tell from this testimony. There are two key aspects to Bernanke’s testimony today and tomorrow: the most recent noise is from various Fed officials and the FOMC minutes that has been about prognosticating the timing of the slowing of QE purchases (mostly based on optimism on the prospects for the US economy) and concerns about unintended consequences of Fed policy have been given full vent. Bernanke will remind us that the dovish hard-core has none of these concerns and resolutely refuses to see any risks from its policymaking – but if there is any rhetorical hint from the Fed Chairman that there are the slightest cracks in the façade of certainty over the rightness of current Fed policy, look out below, market. I still remember Bernanke actually mentioning the idea of “unintended consequences” at a press conference (I believe in December). The only way this subject may be teased out of the Fed chairman in the forum of the semi-annual testimony is if aggressive Republicans today or tomorrow begin either to take the angle of questioning the Fed’s ability to monetize US deficits or the risks of further asset bubbles (the former is far more likely than the latter). I suspect that the Fed front-loaded it easing to last Sep./Dec. in order to prevent the need for new Fed policy as a nomination/renomination process starting as early as this summer.

As a side thought – I’ve been thinking since this Italian election results hit the market like a freight train late yesterday: wouldn’t it be interesting if we see a further panic in equities and risk assets unfolding as Bernanke is testifying….if there is anything more than a “’mini” panic after this massive run up in risk assets since the advent of QE3 and QE3+ (Dec.), it may end up at the Fed’s doorstep where it belongs and put a brake on future Fed policy efforts as political headwinds grow.

On a separate, but related note, Ambrose Evans-Pritchard over the weekend reminds us that the interest rate cycle is another risk for the Fed. It wouldn’t take much of a rise in rates for the Fed to begin losing considerable money on its holdings rather than forwarding profits to the Treasury. Basically, there is no exit strategy from QE – the only exit strategy that central banks and governments can pull off will be one in which they change the rules of the game – like retiring debt that has been purchased by the Fed or even more drastic measures like moving forward with a Chicago Plan ( )scenario, though the latter is only possible in the event of an enormous new crisis.

Economic Data Highlights

  • Japan Feb. Small Business Confidence out at 46.0 vs. 44.2 in Jan

Upcoming Economic Calendar Highlights (all times GMT)

  • Sweden Riksbank to publish meeting minutes (0830)
  • UK BoE’s Bean, Tucker, Miles and McCafferty to Speak (1000)
  • UK Feb. CBI Reported Sales (1100)
  • US Dec. S&P/CaseShiller Home Price Index (1400)
  • US Feb. Richmond Fed Index (1500)
  • US Feb. Consumer Confidence (1500)
  • US Fed’s Bernanke to Testify before Senate (1500)
  • US Jan. New Home Sales (1500)



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Mr. Bernanke’s prepared testimony contained no major surprises, reiterating that highly accommodative policy would continue until unemployment fell significantly and that the potential gains from this stance outweighed the potential risks. He also underscored that the FOMC believes that the Q4 pause in growth was temporary and that the expansion would continue at a modest underlying pace incoming quarters. All in all, there was nothing here to suggest and early tapering off of QE, much less an early end to such.


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